Only the “Good Faith” Early Bird Gets the Worm

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Licudine v. Cedars-Sinai Medical Center, 2018 DJDAR 70 (Ct. App. Jan. 3, 2019)

The Court of Appeal on January 3, 2019 provided us with guidance on when an unaccepted statutory offer made under California Code of Civil Procedure Section 998 will create exposure to the offeree to penalties for its rejection. While this case involves only California’s statutory scheme for offers to compromise, it may have important ramifications in addressing policy limit demands, as both involve issues of “good faith.”

This case arises from a surgery gone wrong. An error during a minimally invasive surgery necessitated a more invasive surgery which left plaintiff with a large scar, a month-long hospitalization and a chronic abdominal condition. As a result, on January 15, 2013, Licudine filed a 3-page medical malpractice lawsuit against Cedars, Dr. Gupta, Dr. Carroll and the Regents of the University of California. Plaintiff alleged that the defendants’ provision of medical services was “below the standard of care,” and that “she (1) had suffered ‘personal injuries and related emotional distress,’ (2) had incurred ‘medical, nursing, health care, hospital and medical expenses,’ (3) had suffered a ‘loss of wages, profits, and earning capacity,’ and (4) incurred ‘other damages and injuries to be proven but which at this time are unknown.’ She prayed ‘for damages within the jurisdiction of the Court.’”

On May 23, 2013, Licudine served her complaint on Cedars. Cedars filed its answer on June 6, 2013, along with a demand for written discovery and for a statement of damages. Just five days later, on June 11, 2013, she mailed Cedars an “Offer to Compromise” pursuant to Section 998. Specifically, she “offer[ed] to allow judgment to be taken against Cedars and in favor of the plaintiff in the amount of $249,999.99, plus legal costs.”

On June 27, 2013, Cedars sent a written “Objection” to the 998 offer, in which it noted that the 998 offer was made only five days after Cedars had filed its answer and that it was “too soon for it to make any determination as to whether plaintiff’s [998 offer] was reasonable” because Cedars had “not had an opportunity to fully investigate this action.”

The offer expired on July 16, 2013. Cedars did not accept the offer prior to its expiration and the trial resulted in a jury award of $1,045,000 in damages. Both Cedars and plaintiff moved for a new trial on damages. The trial court granted both motions and set the matter for a new damages trial. At the second trial, the jury returned a total damages award of $7,619,457, comprised of $5,344,557 in economic damages and $2,274,900 in non-economic damages. Pursuant to the statutory cap on non-economic damages applicable in medical malpractice cases, the trial court reduced the non-economic damages verdict to $250,000, yielding a total verdict of $5,594,557. Plaintiff then filed a memorandum of costs seeking, among other things, $2,335,929.20 in prejudgment interest from the date of her 998 offer to the date of judgment.

Cedars filed a motion to strike plaintiff’s prejudgment interest request. Following full briefing and argument, the court granted Cedars’ motion. In so ruling, the Court found that plaintiff’s 998 offer had been “premature” because Cedars had not “ha[d] an adequate opportunity to evaluate the damages in this case at the time of the 998 offer.” On appeal, the Court affirmed.

Basic Rules regarding 998s

Section 998 sets forth the statutory basis for “offers of judgment.” As the Licudine Court explained:
If a plaintiff makes a “valid” offer to settle a lawsuit pursuant to section 998 that the defendant does not accept, and if the plaintiff ultimately obtains a “more favorable judgment,” she is entitled to have the defendant pay (1) the costs of her expert witnesses incurred after the 998 offer was made ( and (2) prejudgment interest at the rate of 10 percent starting from the date of the 998 offer On appeal, the offeror (appellant/plaintiff here) bears the burden of proving that the trial court abused its discretion.

Although this is not stated in the Code Section, California case law holds that a 998 offer is valid only if it is made in “good faith.” A 998 offer is made in “good faith” if the offer is “realistically reasonable under the circumstances of the particular case.” The idea of 998 offers is to encourage settlement, so the Courts have held that to be in “good faith,” the offer needs to have “some reasonable prospect of acceptance.” The Courts reason that, if the offer has no “reasonable prospect of acceptance,” an offeree will reject the offer no matter what and applying Section 998’s punitive “stick” (interest etc.), will do nothing to encourage settlement.” The theory is that if you allow such offers to ultimately result in the punitive aspects of 998, then offerees would “game the system” by making unreasonable (early) offers, hoping to reap the benefit later if they are lucky enough to have been right. In other words, the Courts do not want parties to use 998 offers “to game the system.” (Internal citations omitted.)

Thus, the Courts hold that the offer must be considered based on the facts known at the time of the offer, not in hindsight. Importantly, although the party making a 998 offer generally has the burden of showing that the offer is valid, it is the 998 offeree who must show that an otherwise valid 998 offer was not made in good faith.

The Licudine Court explained that the test of a “good faith 998 Offer” is two-fold:

(1) “Was the 998 offer within the ‘range of reasonably possible results’ at trial, considering all of the information the offeror knew or reasonably should have known?”

(2) “Did the offeror know that the offeree had sufficient information, based on what the offeree knew or reasonably should have known, to assess whether the ‘offer [was] a reasonable one,’ such that the offeree had a ‘fair opportunity to intelligently evaluate the offer’?”

Thus, the basic question the Court must answer is: (a) Whether the offeree had sufficient information to evaluate the offer; and (b) Whether the offeror knew what information the offeree had? And, to answer these questions, courts are supposed to look to all of the relevant circumstances, such as:

(1) (Although there is no minimum time lapse between filing of suit and the 998 offer) how far into the litigation was the 998 offer made?

(2) “[W]hat information bearing on the reasonableness of the 998 offer was available to the offeree prior to the offer’s expiration?” (Such information may be obtained (a) by virtue of prior litigation between the parties (b) through pre-litigation exchanges between the parties; (c) through post-complaint discovery in the case; or (d) by virtue of a pre-existing relationship between the parties that yields a “free flow of information.”)

(3) “[D]id the party receiving the 998 offer alert the offeror that it lacked sufficient information to evaluate the offer” by, for example, (1) requesting discovery, either formally or informally (2) asking for an extension of the 998 offer’s deadline or (3) otherwise objecting to the offer and “how did the offeror respond?” (The Court noted that the offeror’s response could be “potent evidence that [the] offer was neither reasonable nor made in good faith.” )

The Court Held the Offer Was not Valid

In this case, looking at all of the circumstances in light of what was known at the time, the Court held that the 998 offer was not “valid.” The Court initially held that the offer met the first test — it was “in the ballpark.” The Court found that the jury’s $5,594,557 verdict constituted prima facie evidence that the offer of $249,999.99 was within the “range of reasonably possible results” and Cedars had offered no evidence to the contrary. Nevertheless, the Court held that the offer was not valid because it was not made in “good faith” — Cedars lacked sufficient information to fairly evaluate the 998 Demand.

The Court found:

(A)  As to timing, plaintiff made her 998 offer just 19 days after serving Cedars with her complaint and just five days after Cedars filed its answer.

(B)  Cedars had very little information available to it on the issues of liability and the amount of damages prior to the date plaintiff’s 998 offer expired. Plaintiff’s three-page complaint was described as “bare bones ” because it did not detail the negligence claims and did not list the specific damages sought. Further, no depositions had been taken and the written discovery was served only the day before expiration of the demand. (Interestingly, the Plaintiff did not put the interrogatories in evidence, suggesting they didn’t have much detail either.) Although Cedars had some information (a letter from Plaintiff with allegations of negligence by “her doctors” and claims that her damages exceeded the MICRA cap and photographs of plaintiff before and after the surgery; some discovery responses, provided the day before the expiration; the suggestion to contact her insurance company for the medical bills and to review Cedars’ own file, including her medical chart), the Court of Appeal held that “this information, considered in its totality, did not provide Cedars with sufficient information with which to evaluate the reasonableness of plaintiff’s Section 998 offer” because (among other things) it did not identify which doctor was allegedly negligent, and did not provide information further on general and special damages.

(C)  Cedars had objected to the offer and informed plaintiff’s counsel that the demand came “too soon” to make an informed evaluation. (The Court held that it was not necessary for Cedars to have requested more time.)

Thus, the Court affirmed the trial court’s order striking prejudgment interest because the offer was not made in “good faith.”

This case provides direct insight to those making and those receiving statutory offers. But, it also provides help to those making and receiving “policy limits” demands. In both situations, the parties should examine the context in which the demand is made and take affirmative action — be sure to provide or to request the information necessary to fairly evaluate the demand and document those efforts. They may later find a sympathetic court willing to consider their plight.